How can savers and investors make the most of their ISA allowance? Read our special report to find out.
You don’t need a six-figure salary or an unexpected windfall to turbocharge your ISA savings.
These tax-efficient investment plans can help those on more moderate means kickstart the savings habit and build a decent next egg.
In fact, even those who don’t think they have much in the way of surplus cash to invest can accumulate a nest egg of £35,000 by following the tips below.
Those who want to boost their savings need two key ingredients: money and time. And if the former is in short supply, then all is not lost, provided you commit to adding more of the latter, and savings over the longer term.
Below we look at how start to build significant savings each month and explain a couple of psychological tricks that can nudge you into good investment habits.
Start a ‘Skinny Latte’ Savings Plan
The name might sound like a marketing wheeze dreamt up by a fund manager. But if you saved the £2.50 spent on a cup of coffee on the way to work, you have £50 a month to invest.
This might not seem like a huge sum, but according to Fidelity Personal Investing, this would be worth more than £3,0000 after five years and would be worth almost £18,000 after 20 years. This assumes investment growth of around 5% a year and charges of around 1%.
Of course the more you put in, the larger this pot will be. If you doubled this savings to £100 a month – perhaps by bringing your own lunch rather than buying it each day – this would produce a nest egg of almost £36,000 after 20 years.
For those who can find other ways to generate additional savings, it’s worth noting that investing £150 a month would produce an ISA pot worth more than £53,000 after 20 years, a sizeable sum.
There are a number of ways to adjust your everyday spending habits to generate such savings. Look through some recent bank statements to see where you can make small, but regular savings. For example, switch utility or phone bills and invest the savings; cancel the monthly gym membership and take up jogging instead. Or perhaps you could save on petrol, or bus fares, by walking or cycling to work instead?
Give Your Savings a “Nudge”
Borrow a few tricks from behavioural scientists to help establish good savings habits and making investing as pain-free as possible.
Set up a direct debit, so this money goes straight into your ISA on the day you get paid. If money is tight at the end of the month you’ll have to adjust spending downwards, rather than scrimp on savings.
It’s possible to set up a direct debit that increases each year on year. This helps contributions keep pace with inflation and will provide a further boost to your savings.
For those who really want to maximise their ISA savings, try setting up a direct debit that increases each month: so £50 in the first month, £55 the next month and so on. Chances are you won’t miss the extra fiver, and by the end of the year you’ll have more than doubled your monthly ISA contribution.
Benefits of Regular Savings
Most platforms allow you to open an ISA with just a £25 a month contribution. This can be split between one or more funds, or ETFs. Saving on a regular basis has a number of advantages, particularly for those investing in the stock market.
Hargreaves Lansdown head of communication Danny Cox says this can help smooth out returns, which is useful when markets are volatile. “If you are investing the same amount each month and markets fall, you can buy shares or units in your chosen fund at a lower price.”
This has the potential to boost overall returns as the market recovers. Even if markets remain flat over all, regular savers may still see a positive return on their money from this effect. The technical term for this is ‘pound cost averaging’.
Remember too, that regular savers also benefit from compounding, in other words earning investments growth on their investment growth. This can really help snowball returns over longer periods of time. In fact Einstein described compounding as “the eighth wonder of the world”.
Make the Most of Tax-Efficient Savings
ISAs - and pensions - offer tax-efficient ways to save. If you have savings elsewhere, look to consolidate them so you are not paying unnecessary tax to HMRC.
Remember it there aren’t just income tax savings, money invested in an ISA is shielded from capital gains tax. This might not seem a big concern, when you are starting to save, but this could be a real tax saving for those who accumulate significant investments over 20 or more years.
In a similar vein, if an employer offers a pension where they match contributions up to a fixed level, make sure you are getting the highest level possible. No-one would turn down a pay-rise, so don’t turn down "free" money in your pension either.
Beware of Charges
Boost savings any which way you can: be it contributing more or claiming the maximum tax breaks. But don’t undo this good work by paying over the odds on charges.
Laura Suter, personal finance expert at AJ Bell says: ““There can be a wide disparity between the charges levied by investment platforms and asset managers. The differences can appear small in percentage terms but over a long period, investment charges can have a significant impact on the value of your investment pot.”
She points out higher charges aren’t necessarily a bad thing - if they are for a service or investment you value. Some active managers charge more and deliver superior returns, but this isn’t always the case. Look at fund ratings - such as those provided by Morningstar - to evaluate which have outperformed over the longer term for investors.
Passive funds and ETFs have lower charges. These don’t just lower track major indices – like the FTSE 100 or Dow Jones. It’s possible to buy “smart beta” funds that use alternative index construction. This might track companies that have better environmental track records, for example, or those in a specific sector such as robotics or artificial intelligence.
Make More Drastic Savings
Some investors aren’t looking to make savings of £2.50 a day to boost ISA pots. They are trying to maximise savings in their 20s and 30s, with the view of stopping work well before their retirement age. This strategy has gained support online, where its sometimes known as the FIRE approach: Financial Independence/ Retiring Early.
Andrew Hargreaves, who is in his early 30s, says those that follow this approach aim to save at least 50% of their salary each month. This goes into his ISA and SIPP – both of which are invested in low-cost Vanguard funds.
He says: “I regular review my spending, and if I find I’m coming to the end of the month with more money leftover I increase my regular investments.
“I like the money going into my savings to leave my account as soon as I get paid, so it’s as if it was never there.”
He admits this disciplined approach isn’t for everyone. As well as reducing spending spending on a whole range of everyday luxuries he says he also is trying to maximise earnings at this stage - to boost savings levels. This can mean taking more risk with jobs, and moving when necessary, he says.
